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How This TSX Energy Midstream Stock Became the Best Performer Among Peers

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Oil and gas pipeline stocks generally grow very slowly, and investors don’t bother about it much. All they care about is the stable dividends these stocks pay every quarter. However, one TSX energy midstream stock has been an exception and is on the sharp run this year.

Calgary-based Inter Pipeline (TSX:IPL) has been a solid outperformer and has returned 80% so far this year. This is highly unusual for an energy midstream stock. In comparison, bigger peers like Enbridge (TSX:ENB)(NYSE:ENB) and TC Energy (TSX:TRP)(NYSE:TRP) stocks have returned 25% and 18% in the same period, respectively.

The tussle over the fourth-largest energy pipeline operator

The primary reason behind the outperformance is the bidding war for IPL’s assets. Brookfield Infrastructure Partners made an offer to acquire Inter shares in February this year. However, peer Pembina Pipeline went ahead, making a higher offer and announced its acquisition of IPL in May 2021. The strategic expansion is expected to expand Pembina’s presence in Western Canada significantly.

Since then, Pembina and Brookfield have been engaged in a bidding war that has remarkably boosted IPL stock. After multiple revisions, Brookfield has recently raised its offer to $8.6 billion with a higher cash component. Its initial offer for IPL in February was $7 billion.

The race to acquire energy pipelines is evident, as it is becoming increasingly difficult to build new energy infrastructure in North America. Environmental activists turned too dominant and blocked key pipelines like Keystone XL recently.

As a result, existing infrastructure has gained importance that could become cash cows for owners for years. Also, given the scarcity of energy infrastructure, owners can charge higher fees in the future, increasing their cash flow yield.

Inter Pipeline: Earnings and dividend yield

Inter Pipeline is engaged in a whole lot of activities that include transportation, storage, and processing energy commodities across Western Canada and Europe. Energy pipeline companies, including IPL, have a low-risk business model that earns stable cash flows to transport energy commodities. Energy price volatility has little impact on their earnings due to their long-term, fixed-fee contracts.

Although IPL has notably outperformed peers this year, it lagged them in the longer term. In the last 10 years, IPL returned 130% against Enbridge’s 150%. Pembina returned 165%, while TRP returned 135% in the same period.

The recent surge in IPL stock has notably weighed on its dividend yield this year. It now yields 2.4% — among the lowest among peers. In comparison, ENB yields the highest at 7%, and TRP yields 5.5% at the moment. That’s way superior to the yield of Canadian stocks at large.

Bottom line

Even if Inter shares have stood strong this year, top-yielding peer Enbridge could be a solid wealth creator for shareholders in the long term. Its unmatched pipeline network and scale should fuel stable earnings and dividend growth in the long term. Additionally, such a safe, income-focused investment could come in handy in uncertain times.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool owns shares of and recommends Enbridge. The Motley Fool recommends BROOKFIELD INFRA PARTNERS LP UNITS, Brookfield Infrastructure Partners, and PEMBINA PIPELINE CORPORATION. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. 

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